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S&P 500 Has Best Final-Day Rally Since 1974 on Budget Progress

Dec. 31 (Bloomberg) -- U.S. stocks surged on the last day of the year by the most since 1974 as Congress neared a deal to avert more than $600 billion in tax increases and spending cuts.

Hewlett-Packard Co. and Caterpillar Inc. jumped more than 3.2 percent. Investors bought shares of companies most tied to economic growth, sending technology, energy and materials stocks at least 2 percent higher. Facebook Inc. climbed 2.7 percent after Bank of Montreal raised its rating on the company to outperform from underperform.

The S&P 500 rallied 1.7 percent to 1,426.19 at 4 p.m. in New York. The benchmark index finished the year with a 13 percent gain, its best annual performance since 2009. The Dow Jones Industrial Average rose 166.03 points, or 1.3 percent, to 13,104.14 today. More than 6.1 billion shares traded hands, about in line with the three-month average, according to data compiled by Bloomberg. U.S. exchanges are closed tomorrow for the New Year’s holiday.

“It’s still impossible to know what the specific details are, but this all makes me hopeful that Congress can at least defuse the ticking time bomb,” said Jack Ablin, who helps oversee about $66 billion as chief investment officer of BMO Private Bank in Chicago. “Just the fact that Congress can agree on something is worth celebration.”

Senate Minority Leader Mitch McConnell said lawmakers in Congress are “very, very close” to a deal. He called on lawmakers to “pass the tax-relief portion” of a budget agreement being negotiated that would continue lower tax rates for all but the highest earners.

‘Within Sight’

President Barack Obama said that a deal to avert the so- called fiscal cliff is “within sight” though it hasn’t been completed. The U.S. House of Representatives doesn’t plan any votes on the federal budget tonight, meaning that Congress for now will fail to prevent the $600 billion in tax increases and spending cuts set to start at midnight. Congress could reverse them by acting retroactively early in 2013.

Under a proposed deal, income tax cuts would be extended for annual income up to $450,000, said an official who spoke on condition of anonymity, with rates rising to 39.6 percent on income above that. Expanded unemployment insurance would be continued through 2013.

The S&P 500 advanced 13 percent for the year, extending the bull market rally to 111 percent since March 2009, as financial stocks and consumer discretionary companies advanced more than 21 percent. The S&P 500 erased its loss for the month today, rising 0.7 percent.

Budget Showdown

The gauge slipped 1.9 percent last week, the most since Nov. 9, amid concerns lawmakers weren’t making progress on a budget deal. The benchmark index fell as much as 7.7 percent after reaching the highest level since 2007 in September as Obama’s re-election set up a budget showdown with the Republican-controlled House of Representatives.

The fiscal cliff could lead to an economic slowdown in early 2013, according to the Congressional Budget Office. Economists forecast the U.S. will expand 2 percent next year, down from 2.2 percent in 2012, according to the median of 86 projections compiled by Bloomberg.

In China, manufacturing expanded at a faster pace in December, according to the final reading of a Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics today. The 51.5 figure, the highest since May 2011, compares with the 50.9 preliminary reading published Dec. 14 and 50.5 in November. A reading above 50 indicates expansion.

German Chancellor Angela Merkel said the economy will be more difficult in 2013 than this year.

“The reforms that we’ve agreed on are starting to take effect,” Merkel said in a New Year’s television speech to the nation, sent today in advance by e-mail. “Nevertheless, we still need a lot of patience. The crisis is far from over.”

Cyclical Stocks

The Morgan Stanley Cyclical Index jumped 2.2 percent today, the most since Nov. 19. The Dow Jones Transportation Average climbed 1.6 percent, and an index of homebuilders added 2.5 percent. Technology companies rallied 2.2 percent, the most out of 10 groups in the S&P 500. Energy shares rose 2.1 percent, and raw-material shares advanced 2 percent.

Hewlett-Packard rose 4.2 percent to $14.25 for the biggest gain in the Dow. Caterpillar jumped 3.2 percent to $89.61, while General Electric Co. advanced 2.7 percent to $20.99.

Facebook rallied 2.7 percent to $26.62. The owner of the biggest social network was raised to outperform from underperform by Bank of Montreal analyst Daniel Salmon.

Bristol-Myers Squibb Co. rose 2.2 percent to $32.59 after the blood thinner Eliquis was approved by U.S. regulators. Eliquis was cleared by the Food and Drug Administration for the prevention of blood clots that develop in patients with the heart rhythm disorder atrial fibrillation, the agency said in a statement on Dec. 28. The approval comes three months before the FDA’s most-recent March deadline for a ruling on the drug.

2012 Gains

PulteGroup Inc., the second-largest builder by market value, led the S&P 500’s rally this year, almost tripling to $18.16 in 2012. Sprint Nextel Co. and Whirlpool Corp. were the second- and third-biggest gainers, respectively, each more than doubling for the year.

Shares of financial companies rose the most in 2012 among 10 industries in the index, gaining 26 percent in the best annual return for the group since 2003, data compiled by Bloomberg show. Utility companies were the only group to decline this year, dropping 2.9 percent.

Record High

The S&P 500 will probably surpass its record high of 1,565.15 in 2013 as bears capitulate and the lure of the four- year bull market pulls “everyone in the pool,” according to Laszlo Birinyi, the president of Birinyi Associates Inc. The benchmark gauge for American equity is within 10 percent of its record, data compiled by Bloomberg show.

Birinyi is sticking to the bullish forecast he has given to clients of his Westport, Connecticut-based research firm since stocks hit a 12-year low following the credit crisis four years ago. He says the bull market that began in March 2009 resembles advances that pushed equities up more than threefold in the 1980s and fourfold in the 1990s.

“We’re still very comfortable with the market,” Birinyi said in a telephone interview on Dec. 20. “Our view all along since 2009 is that we’re in the midst of a protracted bull market, similar to 1982 and 1992, markets that went on for four or five years.”

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